Asset pricing and systematic liquidity risk: Empirical evidence from the China stock market

Abstract

In this study, we examine whether aggregate market liquidity risk is priced in the China stock market. We define a bivariate Garch(1, 1)-in-mean specification for the market portfolio excess returns and the aggregate market liquidity. The findings, based on daily data, suggest that risk of market return sensitivity to aggregate market liquidity and volatility risk of liquidity are priced in the China over the period December 16, 1996 to November 8, 2010 while whether market risk is priced is uncertain.